Google's Strong Earnings Beat Expectations, but Its Shares Fall

Internet titan Google (GOOG) reported that first-quarter profit rose 37% to $1.96 billion, a robust earnings result that beat Wall Street expectations. But the numbers weren't strong enough for investors who have grown accustomed to Google walloping expectations every quarter. As a result, Google's stock was trading down nearly 5% in after-hours trading.

Google's solid numbers offer further evidence that the online ad market is starting to heat up as the U.S. economy emerges from the Great Recession.

"As we enter 2010 it's really clear that the digital economy continues to grow rapidly," Google CFO Patrick Pichette told analysts on a post-earnings conference call. "Large advertisers have come back in force versus last year, reflecting a stronger economy."

Google Is Optimistic, but Investors Are Wary

Google hired 800 new employees in the last quarter to bring its head count to 20,600 and Pichette said the company intends to continue hiring throughout the year, in a sign of confidence that the economy will continue to improve. "Going forward, we remain committed to heavy investment in innovation -- both to spur future growth in our core and emerging businesses as well as to help build the future of the open Web," Pichette said.

But despite the company's optimism, uncertainty about the company's dispute with China -- not to mention CEO Eric Schmidt's noticeable absence from the earnings call -- irked some investors. Clay Moran, an analyst at Benchmark, told Bloomberg that expectations for Google may have risen too high.

"Strength in the economy and previously reported tech numbers, such as those this week from Intel, may have gotten investors overly excited about the potential for a big beat from Google," Moran told the news wire.

China Dispute Unsettles Investors

On the conference call, Pichette addressed Google's dramatic dispute with China, which last month led the search giant to relocate its Chinese language search engine to Hong Kong after the Chinese government refused to relent on its censorship practices.

"We've explained to people that the revenue numbers from China are immaterial to our financial performance," Pichette said, adding that the company's dispute with China is a "tough" situation. "Google stands for really important values like openness, user choice and consumer privacy," he said.

While that might sound noble, such a stance is not going to satisfy investors over the long term. After all, China represents the world's largest Internet market. Concern over the China situation has put downward pressure on Google shares since January, and the search giant is under-performing some of its peers in the tech space.

"Even though Google continues to serve mainland China via its Hong Kong site, we believe this strategy is not sustainable longer term, and expect advertisers to defect to Baidu over time," Jefferies & Co. analyst Youssef Squali said in comments cited by Bloomberg.

Big Focus on Mobile

Google executives reiterated the company's intense focus on the mobile space. Jeff Huber, Google's senior vice president for engineering, said the company's Android mobile operating system now runs on 37 devices from 12 different device makers. After a big push from Verizon Wireless, Android has quickly gained almost 10% market share in just six months.

Google officials said the company's Nexus One mobile phone business -- the firm's first branded entrant into the highly competitive smart-phone market -- is profitable, but declined to give further details.

As expected, analysts asked company executives about the Federal Trade Commission's ongoing scrutiny of its $750 million acquisition of AdMob, a leader in mobile advertising. Pichette defended the deal, saying there is "overwhelming evidence that the mobile ad space is nascent and incredibly competitive."

As evidence, Pichette specifically referred to Apple's announcement last week that it intends to enter the mobile advertising market.

CEO Schmidt Absent from Earnings Call

For the first time since Google went public in 2004, Schmidt was not on the earnings call, but Pichette told analysts not to "read anything" into his absence. Pichette said the decision was made to "streamline" the company's earnings announcements and increase the focus on the company's financial performance.

Google's CEO is "everywhere" Pichette added and said that Schmidt remains very much in charge of the company's strategy. Schmidt has in fact made a number of public appearances recently.

Google reported earnings per share of $6.76 on revenue of $5.06 billion, excluding certain items. That's a 23% increase over the same period last year. The results beat Wall Street expectations of $6.60 per share on revenue of $4.95 billion, but they didn't beat the Street's so-called "whisper number," which represents the high end of analyst expectations.

Google says paid clicks, a measure of how often consumers are clicking on the company's Web ads "increased approximately 15% over the first quarter of 2009 and increased approximately 5% over the fourth quarter of 2009." The company says its cash hoard stands at $26.5 billion.